RBA: High $A good for economy

The twin villains of Australian businesses in recent years - the high dollar and increased household savings - have saved the economy from overheating and spared consumers from outsized price hikes.

Reserve Bank of Australia deputy governor Dr Philip Lowe says that though the increase in savings since the middle of last decade and the rise in the Australian dollar had hurt many businesses, they had been good for the overall economy.

The increase in the value of the dollar had helped keep inflation under control and economic growth at a sustainable level during a once-in-in-a-century boom in mining investment.

"Had we not experienced the sizeable appreciation (in the value of the Australian dollar) over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates," he told an economics forum in Sydney on Tuesday.

"This would not have been in the interests of the community at large or, I might add, in the interests of the sectors currently being adversely affected by the high exchange rate."

Dr Lowe said Australians were collectively saving $90 billion more a year than they were in the mid-2000s, which had hurt retailers.

But he said the increase in savings had also helped keep inflation around the middle of the RBA's target range of two to three per cent during the past five years, allowing the central bank to cut the cash rate to its equal lowest level on record.

"Consider how the economy might have looked over the past few years had households spent an extra $90 billion each year," he said.

"The exchange rate would have been higher. There would have been more borrowing from the rest of the world. And both inflation and interest rates would have been higher."

The RBA cut the cash rate 1.75 percentage points between November 2011 and December 2012, bringing it to its current level of 3.0 per cent.

Dr Lowe said the rate cuts were starting to have a positive impact on the economy.

Home prices had increased since mid 2012, home lending approvals were up, the stock market had improved and consumer confidence was above its long-run average.

There were also signs the retail and construction sectors were slowly starting to pick up steam and the jobs market, which weakened last year, appeared to be improving.

Dr Lowe said the RBA was waiting to see if lower rates would help lift investment away from the mining sector quickly enough to offset the decline in mining investment following its peak, expected later this year.